Daily Times

“What need is there for merchants to have any style, or to risk their goods overseas, for the children to learn a trade, for the peasants to sow and to work so hard on the soil, for the skipper to sail on the terrible and dangerous seas, for the solider to risk his life for so little gain, if one can make profits of this sort?” — Dialogue between Waermondt and Gaergoedt on the Rise and Decline of Flora (1637)

This dialogue relates to the time of the Dutch Tulip Mania of 1636-37, which is perhaps considered the first financial bubble in history. It is mindboggling to imagine that people were actually speculating in tulip bulbs, flowers! And that here was actually an exchange to carry out trading of Tulip bulbs, much like the stock exchanges of today; history buffs might recall these were the heyday times of the Dutch empire. That it collapsed and handed over the baton to the British Empire might have more to do with the advent of the industrial revolution than the Tulip Mania; but perhaps this kind of financial largesse and speculation played a part. Critically, if the populace is after easy money, the real economy will take a beating. Under a “what if” scenario minus the tulip mania, the industrial revolution might have originated in Holland! Admittedly, imagination is the only limiting factor when building the what-if scenarios.

And that is the case with all bubbles; the “monkey see monkey do practise” becomes endemic until obviously the bubble bursts generally pushing the smaller investors over the cliff whilst the big players are laughing and counting their money to the bank. Bubbles are when the price of an asset such as stocks, assets and gold becomes over-inflated, and since in most cases the intrinsic value itself is a moving target the euphoria each time is strengthened by the view that this time it is different because of such a valid explanation, which is generally extraordinary in its build up and stupid in essence.

My friends from the stock market, of which there are a bunch full, are well aware of my inclination to agree with John Maynard Keynes on trading in stocks, “It is generally agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of Stock Exchanges.” Admittedly since Keynes, a lot of theories have been developed on investing in stocks, and brokerage houses regularly come out with reports swamped with fancy jargons and unknown abbreviations, all of which blatantly support outrageous valuations, but seriously that in substance is nothing but tomfoolery. Undoubtedly the discount method of valuation is the king of speculation; an excel worksheet developed upon wishful assumptions, verging on fantasy in a number of cases, about the future with columns and rows of macro valuations that can only make sense to the one who did the calculations in the first place, is supposed to correctly determine the value of some pieces of paper that purport to give the owner a physical share in the company, which he most likely will never visit in his lifetime.

If anybody could actually predict future valuations, even of a single share, why and for what reason, under the sun, will he beat the drum about it, unless and until he has positioned his own bets? But even after agreeing with all of the above, I am willing to take a bet that next time if a friend calls with a big, one hundred percent sure tip on a stock, knowing everything, all of you will still dive in; against greed, men are like clay pigeons! This is the one reason Darwin should have discussed in his imbecilic monkey theory. Irrespective, and to comfort my friends from the stock market, this is not the article that they fear where the stock speculation is annihilated; that would be someday soon. Today we are interested in asset bubbles in general and their repercussions.

In most cases, prices simply go up because of the Central Bank’s ability to create unlimited amount of money with its magic wand: the monetary policy. Pertinently if there was a limited amount of money, say pegged with gold, the property and stock markets in Pakistan, or across the globe, would not be breaking records every day. Assuming that there is only one commodity, a glass of water, and two thirsty persons with Rs. 100 each, the glass cannot sell for more than Rs. 200, with each person getting half a glass. Now if the Central Bank doubled the money in circulation, each person will have Rs. 200 and that very same glass of water will now sell for Rs. 400; now if that’s not magic what is? Why the Central Bank would do that is inexplicable anyways so let’s not waste time on that.

Without markets going into bubbles and bursting, wealth cannot increase, because, rest assured, market makers make money going up and coming down; but for them to do so, the game must go on. Hence, if the property bubble flattens in Islamabad, the game is on in Karachi or Lahore, or the stock market is jumping, and vice versa. And eventually, everybody gets sucked in, enticed by the sparkle of easy money. Another form of easy money is corruption, which as we discussed last week, the ‘amazing Pakistani man’ can do nothing about. But notwithstanding how to make it, the biggest problem with an easy money culture is the belief that money can be doubled quickly and without any perceived repercussion, which drives investors away from the real economy, the one that is responsible for creating jobs.

Understand carefully, if a value of a share in the stock market goes up, it does not increase the productive capacity of the underlying company in any manner; or if the value of a land goes up, it does not suddenly start producing more grain. Here the defenders of the biggest game in town will jubilantly point out that it is the other way round: prices go up because there are more profits or produce. High levels of gas and power load shedding, declining exports, decreasing agricultural produce and falling commodity prices are hardly indicative of growth over the recent past, which is sufficient evidence to destroy that theory. Sure, banking profits increased, which is because they deal in money, and the mode of choice for speculation.

Dear readers, this is not a groundbreaking insight. During its transformation after the World War II, Japan had punitive capital gains taxes on short-term property gains at 150 percent of profits. Obviously, this policy killed property speculation and forced people to save; national savings remain the only source of national investment contrary to the paradigm that FDI is the knight in shining armour. Minus domestic investment, foreigners will be fearful of jumping into any economy. Somebody rightly said that the helping hand is the one attached to your own wrist. That brings us to the quote at the very beginning: why do anything for so little gains when money can be made easily.

The policy makers are not helpless; they have a choice to either allow the continued financialisation of the economy, with speculation the norm, or nudge savings toward the productive real economy: manufacturing. The culture of easy money has to be nipped in the bud if the nation wants to stand on its own two feet.

The writer is a chartered accountant based in Islamabad, and can be reached at syed.bakhtiyarkazmi@gmail.com